Why Greggs’ share price has crashed despite growing sales
The Greggs (LSE:GRG) share price has fallen 42% since the start of January. But the company isn’t in decline by any means â sales grew 7% during the first half of the year.
Given the firm’s position at the start of 2025 though, this shouldn’t be a huge surprise. And understanding this can help long-term investors avoid similar situations in future.
Short opportunities
Short sellers make money when shares go down. And just as there are various reasons for thinking a stock will go up, there are different things short sellers look for.
One type of opportunity is known as a ‘Phase 2 Ex-Growth’ short. That’s a fancy name for a situation where a company moves from an initial period of high growth to a more moderate one.
Importantly though, the share price still reflects rapid assumptions about future growth. So the share price hasn’t caught up to the reality for the underlying business.
The idea is that this type of stock is set to fall when the company reports earnings and investors realise the discrepancy. And this has been happening with Greggs this year.
Slow growth, high valuation
At the start of the year, Greggs’ shares were trading at a price-to-earnings (P/E) ratio of almost 20. Thatâs higher than the FTSE 250 average, suggesting investors were expecting strong growth.
This however, hasnât really materialised this year. Total sales are up 7%, but this continues a trend of steadily declining growth rates since the end of the Covid-19 pandemic.
Worse yet, the increase in overall revenues is largely the result of opening new outlets. Adjusting for this, growth came in at around 2.6% in company-owned stores, which is below inflation.
Thatâs why the stock’s been a good Phase 2 Ex-Growth short. The stock began the year at a high multiple, but after a strong recovery from the pandemic, growth rates have steadily subsided.
Where are we now?
A lot has changed in terms of Greggs’ shares since the start of the year. For one thing, a P/E multiple of 11 reflects much optimism about future growth.
Thatâs not to say the share price canât fall further â it absolutely can. But it is to say the valuation doesnât look so demanding at todayâs prices.
In fact, there are even reasons to consider it as a potential buy. Management’s attributed a lot of the recent underperformance to unusual weather conditions weighing on high street footfall.
With a 4.25% dividend, investors might think the company could be a good source of passive income over the long term. The firm isnât growing quickly, but itâs clearly not in decline either.
Final Foolish takeaway
There are a lot of companies that would be pleased with 7% sales growth. But for Greggs, it marks a continued slowing of revenue growth since the end of the pandemic that might be set to continue.
With the stock trading at a much lower multiple, I don’t think it’s such an obvious example of the kind of thing short sellers are typically interested in. But that doesn’t mean I want to buy it.
From a long-term perspective (the Foolish approach to investing) I see Greggs’ shares as being in a sort of stock market no manâs land. I think it’s worth following, but it doesn’t jump out at me right now.
The post Why Greggs’ share price has crashed despite growing sales appeared first on The Motley Fool UK.
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More reading
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- Down 20% in 2 months! Will the Greggs share price recover?
- The Greggs share price is at its lowest in years. Is it a bargain in plain sight?
- Down almost 50%, is this the best value stock in the FTSE 250?
- Here’s how many Greggs shares an investor needs to earn £1,000 a year in passive income
Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Greggs Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
